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What is the difference between sum assured and fund value?

The introduction of a Unit Linked Insurance Plan (ULIP) created a lot of stir in the investment market. Since a ULIP product was new in the market, many of you might have hesitated to invest in it due to the lack of awareness. A ULIP product is a financial product with the dual benefits of investment and insurance. Since investment and insurance are the two essential elements of a ULIP policy, understanding the difference between sum assured and fund value can be crucial. Therefore, let’s first begin by learning the meaning of these two broad concepts in detail:

What is a sum assured?

The sum assured value can be a part of ULIP insurance. Since a ULIP policy provides financial cover, your insurer can offer a financial payout called sum assured value in your absence to your family members. With the sum assured amount, your family can live peacefully without financial constraints after your demise. Moreover, it can allow them to maintain their standard of living when you are not around to provide them.

What is the fund value?

The fund value of a ULIP policy can be investment-based. A ULIP policy can allow you to choose between equity funds and debt funds based on your risk appetite and investment goals. The total number of units that you own as a policyholder can be termed as fund value. To calculate the fund value, you should multiply the net asset value (NAV) of each unit on that particular day by the total number of units held. Typically, the fund value can change based on the NAV, which is the price of a ULIP fund. As a policyholder, you can calculate NAV by deducting the associated liabilities from the fund’s assets.

Sum assured, and fund value can be the two most crucial components of a ULIP policy. Although they are two different concepts, many of you might often confuse them with one another. To clarify the difference, let’s take three different scenarios under which you can receive the ULIP payout. Under each illustration, you can understand the difference between the sum assured and fund value and how each of it is executed:

  • Death of the policyholder – If anything happens to you during the on-going tenure of the ULIP policy, your insurer can provide your family with either sum assured or fund value, whichever is higher. When the fund underperforms, it might generate a minimal amount than sum assured value. Under such a scenario, your family might receive the sum assured after your demise.
  • Maturity of the ULIP policy – A ULIP policy can mature after the completion of the lock-in period (5 years). When the ULIP policy matures, you can receive the fund value.
  • Discontinuance of the ULIP policy – As an investor, you should mandatorily complete the tenure of the ULIP policy for the growth of your wealth. However, you might decide to withdraw your ULIP policy before the completion of five years due to many reasons, such as minimal returns, high ULIP charges, and so on. If you surrender the ULIP policy, your insurer can deduct applicable charges from your fund value and offer you with a surrender value after five years. If you surrender the ULIP policy after five years, you can receive the fund value.

In a nutshell, a ULIP policy can consist of many concepts apart from the sum assured and fund value that can require a better understanding. While sum assured and fund value can form the basis of a ULIP policy, you should research about the other concepts as well before investing in a ULIP policy. Therefore, conduct thorough research on a ULIP policy and consult a financial expert to ensure you learn what is ULIP policy before the investment.

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